Friday, February 01, 2013

Distinctive Elements of Keynes' General Theory

An argument for the possible existence of an equilibrium with widespread unemployment.

A setting in historical time, not logical time.

A claim that interest rates are to be explained by monetary and financial markets, not by causes in the "real" economy.

Paul Davidson rightly notes that Keynes strove to make his theory compatible with any degree of monopoly. This differs from Michal Kalecki, who just assumed the degree of monopoly empirically existing. But Kalecki and Keynes had different objectives; Kalecki was not as interested in internal criticism of existing neoclassical theory. Nevertheless, I think Keynes' assumption of an independent investment function may have reflected existing corporate structures. In particular, Keynes was aware of the separation of ownership from control in joint stock companies. This awareness has something to do with what Keynes meant by the "socialization of investment." Maybe it also facilitated his awareness of the possibility of investment decisions as an independent driving force for the economy.

Keynes offers a theory of a (Marshallian) short run equilibrium. For most of the book, capacity is given. Keynes analysis addresses the question of what level that capacity will be operated at. (In chapter 5, he does offer a theory of a long run equilibrium, in which the expectations that guided the installation of the present array of capital equipment have persisted since their production and are currently being satisfied.) In offering a theory of equilibrium, he needs to answer why the multiplier process does not create a cumulative process that goes on unceasingly. Somewhere I have read that Keynes' ability to answer this question distinguishes him from some potential precursors.

The distinction between historical time and logical time includes the distinction between uncertainty and risk. If I recall correctly, Hyman Minsky describes Keynes setting as having a business cycle background.

I am deliberately not putting forth the liquidity preference theory of interest as a distinctive feature. Keynes needed liquidity preference to explain why interest was a monetary phenomenon, not a matter of bringing the real economy into equilibrium. And the theory certainly generated lots of discussion. But once you see that interest rates are a monetary feature, must you retain that specific theory? Can I not think of the long run interest rate as what emerges from a succession of short runs, where the interest rate emerges in those short runs from speculators disagreeing over their views of the long run? In others words, cannot one accept interest rates as some mixture of being held up by its own bootstraps and of conventions, perhaps supported by the monetary authority?

I do not here make any claim about originality. This post was inspired by reading DanielKuehn and Jonathan Catalan noodling over the question of what was original in The General Theory.

3 comments:

Note that Amadeo (1989) argues, convincingly from my point of view, that one of the characteritics of the evolution from the Treatise to the GT is the move from dynamic (historical time) analysis to equilibrium (unemployment equilibrium and the logical multipler).